4-Consumer Theory (II)

4-Consumer Theory (II) - Agenda Course Overview Individual...

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9/1/2010 1 Agenda Course Overview Individual Demand Effect of Income and Price Changes Market Demand What To Take Away Microeconomics The Structure of the Course Consumers and Producers Market Interaction Today’s lecture Uncertainty Perfect competition Monopoly and Pricing strategies Competitive Strategy Auctions Information in Markets and Agency Game Theory Introduction to Markets Consumer Theory and Demand Technology and Production
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9/1/2010 2 Agenda Course Overview Individual Demand Effect of Income and Price Changes Market Demand What To Take Away Individual Demand The individual demand for a good specifies how much a consumer is willing to purchase of that good for each combination of prices and income . The demand for good i by individual j will be represented by How does the consumer calculate her demand? In our previous lecture we develop a model of consumer behavior that allows us to answer this question: a consumer selects her preferred combination of goods among the ones that are affordable. Thus, to derive the individual demand of a consumer we need 1. Consumer’s preferences over different goods. 2. Prices and income to determine the consumer’s budget constraint . ( jj i i i -i j x x p , p ,I ) This model of consumer behavior will allow us to draw simple insights from a very reduced set of reasonable assumptions. For instance, it will allow us to understand how changes in the economic environment are likely to affect demand for a product.
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9/1/2010 3 Example: Understanding Jane’s demand Jane consumes both clothing and food per month. Her utility from x units of food and y units of clothing is given by We want to derive her demand for clothing and food as a function of market prices and her income. Given prices p x for each unit of food and p y for each unit of clothing, and her (monthly) income I , Jane will choose the best combination of food and clothing among the ones that are affordable to her. We compute Jane’s optimal choice by finding the point on the budget constraint where the MRS between the two goods is equal to the slope of the budget line. 3 5 u(x,y) xy Example: Understanding Jane’s demand Given Jane’s utility function the MRS between food and clothing is At the optimal combination of food and clothing, the MRS is equal to the slope of the budget line Note that given Jane’s utility function she spends three times as much on food than she does on clothing (this is not always the case for other consumers with different utility functions than Jane!).   3 2 ( , ) / 5 1 ( , ) / 3 53 u x y x y y MRS = u x y y x xy   1 3 3 xx yx yy pp y MRS = yp xp p x p
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9/1/2010 4 Example: Understanding Jane’s demand What is Jane’s demand for food and clothing? Well, given the necessary condition on her optimal choice that we have just derived and the fact that her optimal combination must satisfy the budget constraint we compute Jane’s demand for food and clothing 3 yx
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This note was uploaded on 11/30/2010 for the course ECON 251 taught by Professor Tontz during the Fall '10 term at USC.

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4-Consumer Theory (II) - Agenda Course Overview Individual...

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